Tribeca Global Management

The building of an institutional class multi-strategy hedge fund manager

Simon Kerr

The last few years have seen the "Super Start-Up" dominate the distribution of day one capital to new funds. Typically these have been multistrategy funds set up by a senior proprietary trader from an investment bank, a recent example being the three traders that established Old Lane LLC. Vikram Pandit, John Havens and Guru Ramakrishnan of Old Lane (and formerly of Morgan Stanley) started trading with $4bn and a staff in excess of 30 people. From day one Old Lane, Eton Park and Axon-TPG Capital and the like have been the real deal – fully formed hedge fund management companies with everything in place including service providers, financial market networks and risk management systems. Day one capital for these firms can come partly from former employers and partly from seasoned investors in hedge funds. As one fund of funds allocator said recently "I could have the whole of my fund of hedge funds invested with former employees of Goldman Sachs alone."

Tribeca Global Management LLC is not like other Super Start-Ups: for one thing it is completely owned by Citigroup. Also it is distinguished as a start up because it has been driven by a vision, and it has had a planned development rather than being grown opportunistically.

From early on there has been a wider vision of what the company should ultimately become. This vision came from Tanya Styblo Beder, the Chief Executive Officer of the firm who joined Citigroup in May of 2004, and she continues to expound it to her staff and potential investors. "What we are creating here is the hedge fund manager of the future," she says. "Tribeca is a multi-strategy fund manager that provides the best of a fund of hedge funds manager and the best aspects of a single manager. We are a diversified manager that can invest in each asset class and can utilize a broad range of investment strategies within them. An institutionalized multi -strategy product offers investors the benefits of broad diversification of fund of funds managers with the single layer of fees of multi-strategy managers." Multi-strategy hedge funds typically produce higher returns than funds of hedge funds, and the new generation multi-strategy funds are as concerned with downside risk control and delivering low correlation with other assets as any fund of funds.

"Today, investors seek more and more of an institutional look and feel," states the CEO. "We want to be able to pass all the due diligence checks that an institutional investor would want, because that is the way the industry is being driven. The growth of institutional participation is rapidly outpacing individual participation – leading to the need for long-run, institutional platforms. We are here to answer that need."

The commitment of Citigroup cannot be in doubt. The global financial services company announced in 2004 that it would allocate up to US$ 2 billion as initial capital to Tribeca, its hedge fund platform, to meet the changing needs of institutional hedge fund investors. Part of that commitment has been to an infrastructure that the senior management of the firm insisted was put in place as a first step. There has been no catch up of the back and middle office here. It has been reported that systems spending has run into the tens of millions of dollars, but that was seen as an absolute necessity for both control by management, and for effective reporting to clients. The whole infrastructure has already been implemented such that the current platform could handle assets that are five times the current level.

The name Tribeca was already being used inside Citigroup when Styblo Beder was recruited, and today Tribeca runs two funds, a flagship multi-strategy fund and a convertible arbitrage /distressed/merger arbitrage fund. SEC filings show that Tribeca was an active investor as far back as February of 2004. The arrival of the energetic CEO fomented a busy period. Dozens of traders were recruited and 14 trading strategies were launched in the first year of operation. The enhancement of capabilities did not cease then and won't stop now. The current range of 23 strategies provide sufficient capacity to manage billions according to the latest estimates. It is envisioned there will be as many as 50 strategies in the flagship institutional hedge fund platform globally.

According to Citigroup there are many unique features of the new product offerings within Tribeca. They are said to include (but are not limited to) capital allocation methodologies, risk and return management of the overall portfolio, synergies with other Citigroup asset management businesses, and specialized operations that will enable implementation of cutting edge and technology-leveraged strategies.

Tanya Styblo Beder: providing clarity of leadership

It is perhaps in the last feature that there is a hint as to why this particular CEO was brought aboard. Styblo Beder has proven abilities as a manager of a business and provides clear leadership to an immature firm. The ethos of the firm and its investment culture as it has developed, stem from her as much as anybody. But in two phases of her career she has acquired skills and experience that are particularly relevant to her current position.

Previous to Tanya Beder's move to Citigroup, she was a Managing Director and Head of the Strategic Quantitative Investment Division of Bruce Kovner's Caxton Associates, LLC, the $11 billion investment management firm located in New York City. It is significant to recognise that that this position was within one of the world's premier investment organisations, and involved putting investor's capital to work employing leading edge quantitative strategies. Lessons have been taken on board as Styblo Beder predicted in the autumn of last year that certain strategies would begin to clearly outperform others in the future, particularly those strategies where sophisticated quantitative trading systems are employed. "It costs you upward of $50 million to put in a high tech platform to do this kind of trading, but it is also one of the places where there are high returns," she told a European conference. The six system-based trading strategies employed at Tribeca deploy a significant part of the total capital of the fund.

The second point of significance of Styblo Beder's time at Caxton is that a key activity at a multi-strategy hedge fund is the appropriate allocation of capital to strategies and individual traders. Firms at the level of Caxton and Tudor have to be adept at matching capital allocations to market opportunity across markets and trading strategies, and Tanya Styblo Beder's time at Caxton allowed her to see the process in action at a premier firm. This is not a trivial point. "We think that allocating the capital across our trading books will add value of between 1 12 and 2% per year," says Gay Huey Evans, President of Tribeca Global Management Europe (TGME). When multi-strategy firms target low double-digit returns on a consistent basis, then obviously a couple of per cent will make a great deal of difference to the fund rankings in the performance tables. Two percent a year over a 3-5 year period would be most of the difference between first quartile performance and median amongst diversified multi-strategy hedge funds.

Prior to Caxton Tanya Beder was for over a decade the President or Chairman of Capital Market Risk Advisors (CMRA). CMRA is a financial advisory firm specializing in risk management, hedge funds, due diligence, compliance, portfolio construction and risk attribution. She has also been Chairman of the Board of the International Association of Financial Engineers, and she was an author of the Risk Standards for Institutional Investors and Institutional Investment Managers. Beder has an MBA in Finance from Harvard and a degree in mathematics from Yale but the CEO of Tribeca is not a theoretician. "I'm a math person for sure," she states. "But importantly I think it is critical to understand what the numbers can and cannot do," she qualifies.

This facility with the quantitative aspects of finance was well applied at Capital Market Risk Advisors. The CMRA client list includes names of the quality of Vanderbilt University and The Common Fund, which may be expected. What is less common for a relatively small advisory firm is to have names like the Federal Reserve Board of Governors, JP Morgan Chase, Goldman Sachs and Bankers Trust on the client list. The quality of the client base and the embedded knowledge within the client firms suggest that CMRA has carried out some high-end project work, and indeed that has been the case. CMRA has been called in to help with quite a few high-profile financial problems. Orange County in California had an investment pool that supported various pension liabilities. The pool lost $1,700m from structured notes and leveraged repo positions. CMRA includes Orange County amongst the organisations it has worked for, which says in particular that the firm has had an in-depth understanding of derivative structuring.

A derivative background is particularly suitable for someone working in funds of funds or for someone that has to look across strategies in a multi-strategy hedge fund. An understanding of derivatives requires some knowledge of financing (that is rates and yield curves) and the linkages with other traded markets. To become accustomed to optionality,and to be comfortable with quadratics and non-linear functions is part of it. But there is more. Modern trading is about volatility and correlation – the higher moments – as well as directionality. So Tanya Styblo Beder's background is ideal for someone who has to handle risk management and measurement at a high level, and at the same time be capable of implementing tactical market views.

Gay Huey Evans: running the European business

The derivative theme also played strongly in the recruitment of Gay Huey Evans in Europe. Prior to joining Tribeca she had been the Director of Markets at the Financial Services Authority (1998 – 2005) responsible for the UK Listing Authority, supervision of all market infrastructure providers, including exchanges, ATS, clearing and settlement houses, market policy and market surveillance. She was also appointed Capital Markets Sector Leader at the FSA. This background may give the external perception that Gay Evans was recruited as a door-opener for Tribeca. Far from it. "I'm first and foremost running a business here," she states. "There are functional and operational issues to address: I have been involved since my arrival in September in the back and middle office hires. I have hired some of the portfolio managers here, and I am responsible for risk taken in the European markets."

Evans says she has drawn a lot from her time at the FSA. "It really made me more efficient working there," she confesses. "You have to be capable of dealing with the volumes of paperwork there. You learn to make decisions. It also gave me something in attitude too. I learned that one should search for excellence not perfection."

The derivative link goes back a step further in Gay Evans' career path. Prior to joining the FSA in 1998, she was a Senior Managing Director in the Risk Management Services division of Bankers Trust Company, where she focused on derivatives, securitization and complex engineered transactions. She had the high profile role of Chairperson of the International Swaps and Derivatives Association from 1994 to 1998. Evans was also in the International Association of Financial Engineers. This Association was the direct link between the Tribeca CEO and the President of TGME as they were both members, and their acquaintanceship started at this time. The shared elements in background give the two women at the top of Tribeca a common language of risk and markets. This has facilitated the transfer of the firm's culture from New York to the offices in Europe – a goal that is commonly desired but difficult to inculcate in new, fastgrowing firms.

"Tanya sold me the story when I was being recruited," says Gay Evans. "She understood the need to be entrepreneurial within a huge organisation if the hedge fund firm was going to succeed. And she has kept that entrepreneurial edge in Tribeca. We try hard not be consumed by the Group processes, and we are not, and that is to her credit." For her part Tanya Beder had to exercise some patience: "I was very pleased to get Gay to join us, though her "gardening leave" went on for ever."

Gay Evans and Tanya Beder are two of the eight members of Tribeca's Investment Committee. The Committee meets weekly to monitor and direct risk assumption across the fund, and the positions of its various members tells the outside world how Tribeca divides the investing world. Aside from the CEO and Presidents of Tribeca Europe and Tribeca Asia (Albert Ee), there is the Head of Equities and Credit (Oliver Dobbs), the Head of Fixed Income, FX and Global Macro (Steve Geovanis), the Director of Investments (James Kemp), the Head of Systems Trading (James Lu), and the Chief Risk Officer (William Venezia, who worked with Tanya Beder at CMRA). Along with the Chief Technology Officer and Chief Administrative Officer the membership of the Investment Committee make up the senior management team of Tribeca Global Investments. It is telling that at launch and for some time afterwards the senior management team outnumbered the portfolio managers at Tribeca, underlining the controlled growth of the business.

"The markets have reached a new level of sophistication."

The CEO's vision for Tribeca is founded on a particular take on the path of development of capital markets. "It took 200 years for economic theory to get to where it is today. Portfolio Theory was developed in the 1950's, and the application of that theory to markets could only happen with computers. So Portfolio Theory has been applied for the last 20 years. In the late 70's we did not have many of the financial techniques that are part of our daily life today. Zero-coupon curves, spreads to price fixed income instruments and option-adjusted spread models only started to be used in the early 1980s. Caps and collars and floors only arrived in the mid-80's, and, if you recall, there were only two states of life – volatility was either 0 or 1. Stat arb is only possible with computers so that developed during this period as well. When pairs trading started you could close out a trade two days late and it made no difference. The markets have reached a new level of sophistication through the application of computer power. There are now 60 financial engineering programs at many of the finest universities around the world. The graduates go on to apply technology to markets. So the markets act differently to the way they used to."

Tanya Styblo Beder has a series of observations about traded markets that inform her vision for Tribeca. "Trends emerge and die more quickly in today's markets," she suggests. "(Price) reversion happens far more promptly than it used. (A related fact is that) volatility is very low in all markets, and it is going to stay that way. There are better information flows to account for these phenomena." On top of these general observations, the Tribeca CEO reports that arbitrage strategies have acquired different characteristics through time: "arbitrage comes and goes in these sorts of markets. A good example in recent years is convertible bond arbitrage – everybody allocated there three or four years ago when returns were in the midteens. Last year there were poor returns and redemptions, and this year CB arb has done well." The implications for a multi-strategy fund are clear.

"You have to be very well diversified," states Beder. "A multi-strategy hedge fund has to have a big deck of portfolio managers. Multi-strat funds have tended to be focussed on one factor, like global macro or equities or credit or fixed income. You have to go beyond that. We prefer our portfolio managers to be very experienced." She continues on her theme, "our PMs have an average of 12 years experience and that will mean they each will have seen two to four cycles for their particular strategy. We want managers that will beg for the capital to trade when the opportunities are there, but know enough to give it back when they are not."

The PMs at Tribeca have come from hedge funds, from asset management houses and from prop trading desks. "They each have to handle markets that turn on and turn off," says Beder, "and they should be mature enough to recognise that they will get the capital back. Nothing lasts forever, and markets change. So the structure we operate allows us to leverage our people better compared to (the structures used by) others in the markets." She goes further, stating that "experience is one of the best ways to address the variability of market conditions."

Reach is considered very important in a global multi-strategy like Tribeca. They want to be global as investors as well as in name. Having a real continuous presence in markets gives informational advantages and the ability to execute well across a broad front. For some higher frequency trading strategies such capabilities are imperative. Tribeca isvery keen on cross-market arbitrage, and in the view of the CEO you need to be genuinely global to do this properly.

Trader attributes and trader input

From the bottom-up Tribeca looks for particular attributes in its traders. "We need to see the technical skills," says Gay Evans, "as well as the fundamental knowledge. We go into some depth on the trader's risk control. We ask them what was the worst scenario they have lived through. What is their thinking when they put something on? We like to check that they think through what they do. And we have found it very important to ask where they get their trade ideas. It is also good to know how they manage themselves – are they efficient, how are they working with others? We are building teams here after all."

Each trader has their own risk limits agreed before they join. These mission statements are put in writing. The value-at-risk, sector and geographical diversification , and P&L tolerances are detailed. Twenty six PMs have been recruited and two have been fired because they couldn't abide by their own risk agreements. The portfolio managers also feed information directly to members of the Tribeca Investment Committee to enhance the asset allocation decision making.

That is not the only information used by the IC that comes from the traders. The trader's current risk assumption in his strategy is tracked against his own history and against his risk limits. Of course they have absolute benchmarks, but management also wants to know whether the traders are capitalising on the opportunities that the markets give them. In a reflexive process the positioning of the Tribeca traders tells the IC about what the bottom-up view is of opportunities in each strategy. In addition, the risk measurement systems at Tribeca show the factor risk at the strategy and whole fund level. Each portfolio and the whole fund are stress-tested.

Co-ordinating across the whole fund is taken very seriously. One PM may be short an instrument while another may be long – that is not unusual in a multi-strategy fund environment. Tribeca will be turning the data on its own traders into information at the fund level. When, say, half are short and half are long of something, then the Contrary positioning may be indicative of a choppy market – "we track that sort of information and use it," says Beder. Who is taking which risk is important. Across a large, global trading book there may be inconsistencies to review, for example if the energy group had positions to benefit from rising oil or gas prices, and the net fund exposure built up across other portfolio managers was the opposite way round.

Such aggregated risk assumption is dealt with at Tribeca through a completion book. The completion book will ensure that the fund's net risk exposure is as desired. The factor bets taken at the team or portfolio level may not be mitigated necessarily at the fund level. Sometimes additional risk is taken. The completion book can be 10% of the total fund risk and has been 40% of the risk budget at times last year. With the low volatility seen in recent years there come times when the completion book will go long volatility. Another role of the completion book is to ensure that Tribeca as a whole does not become too offside compared to its competition. In the early years the management want to ensure that there is no 'screw up' operationally, and that there is no relative performance reason for Tribeca to be excluded from investor consideration.

In terms of capacity expansion Tribeca plans more in Europe and Asia. Gay Evans would like to add more PMs and maybe a special situations analyst to broaden the capabilities of TGME. "We need experienced traders at the moment. We can deepen our bench with less experienced PMs or traders later," she says.

Tribeca Global Management Asia has six PMs in Singapore that cover long-short equity, global macro and yield curve arbitrage in theregion. While it is unsurprising that TGMA would like to add a quality long/short Japanese equity team, more unusual would be the execution of the plan to open a Shanghai office for research and development.

Co-opting the banking behemoth

In some ways Citigroup has gone against type in seeking to build a business of scale from scratch. It is rather known as a buyer of businesses. In any event aren't hedge fund management companies boutique businesses? Wouldn't the bureaucracy and power politics of a large organisation just get in the way? Apparently not – "I expected more difficulty in building this business," confesses Tanya Beder; "any moment there should have been an elephant stepping on my toes. But it never came. Instead we have had great support, and when some of the capabilities of an organisation as big as Citigroup are put at your disposal good things can happen – and have happened – really quickly."

As for the boutique nature, Gay Evans says "I was told when I was considering joining that Citigroup was building a business and they wanted it to have an entrepreneurial feel to it. And my interviewers were right: it has that." At the same time Tribeca wants the imprimatur of institutional investors. This is reflected in the Tribeca management's approach: " We have 182 written policies and procedures," discloses Tanya Beder. "You just don't get that kind of thoroughness at the typical hedge fund organisation."

"Tribeca provides a dynamic, entrepreneurial environment that fosters a culture of excellence and teamwork" runs the self-description in job ads, and strange to relate there is some truth there. What has been done at Tribeca Global Management could be described as a good plan very well executed.